Foreign Trade, U.S.

Foreign Trade, U.S. Trade and commerce have had a formative influence on America from the Colonial Era onward. The British colonial system embraced the doctrines of mercantilism, with its closely regulated trade, restricted economic development, and unfavorable balance of payments for the American colonists. After independence, Americans melded the free‐trade doctrines of Adam Smith's Wealth of Nations (1776) with their revolutionary cause.

From the Early Republic to World War I

. The federal Constitution eliminated interstate trade barriers while providing for the consolidation of trade policy. Incorporating commercial values with national interest, Americans assumed that the territorial and commercial wars of the past would yield to a peaceful era of free economic exchange among nations. Foreign trade's relative importance declined in the nineteenth century, however, as internal development intensified. Exports fell to about 6 percent of gross domestic product (GDP), while exports and imports combined constituted an average 12 percent. The South's cotton economy remained export‐led; economic growth overall was not.

Following the Napoleonic wars (1803–1815), Great Britain adopted free‐trade policies, stimulating phenomenal growth in world trade per capita between 1800 and 1910. After 1850, international economic relationships strengthened so that the national economies of the Atlantic region showed common features of specialization, urbanization, trade cycles, and movements of capital and labor. In this same period, the United States moved steadily from the periphery of this system to the center, the core of the international economy.

Through the nineteenth century, American exports were largely raw materials. Primary products, including raw and processed foodstuffs, forest products, and minerals, constituted 80 percent of American exports. Manufactured and semimanufactured goods comprised about two‐thirds of imports. As the trans‐Mississippi West came into production after the Civil War, half of the increase in wheat production was exported. But the expansion of manufacturing counted most in the accelerating rate of economic productivity. In 1860, manufactured goods accounted for 20 percent of U.S. exports; by World War I, the figure had climbed to 50 percent. Overall, until 1895, Americans bought more abroad than they sold, setting the deficit account by borrowing from abroad, or paying in the internationally recognized exchange of gold.

Since tariff receipts were the largest source of federal revenue until 1913, when they were overtaken by tax revenues, tariff duties could only selectively restrict, not wholly prohibit, imports. American competitive advantage took the form of innovations in mass production and mass marketing of foodstuffs and retail goods, made possible by the large and comparatively affluent domestic market. The efficiency of these techniques, rather than the protective effects of the tariffs, enabled U.S. manufactures to compete effectively and generate a surplus trade account for most of the twentieth century.

From World War I through the 1960s

. The combined strength of agricultural and manufactured exports after World War I led to an anomalous situation in which the United States captured 27 percent of world trade while its exports constituted only 6 percent of the total U.S. GDP. Since tariff disputes in Congress originated mostly among specific business interests, economic groups, and regions, the U.S. government did not sufficiently recognize the profound implications of the lopsided trade and credit balance. Corrective action required that the United States reduce its tariffs and encourage private lending abroad. Instead, a business‐labor alliance embraced more highly protective tariffs, to offset alleged differences between foreign and domestic production costs occasioned by higher wages in the United States. This outlook produced the high Fordney‐McCumber tariff (1922) and the even higher Smoot‐Hawley tariff (1930).

Tight credit policies further contributed to a world credit collapse in 1929, from which industrial nations sought relief in regional trade blocs. These encouraged import substitution, i.e., domestic production of what could be more cheaply produced and purchased abroad. The value of U.S. exports fell by half from 1929 to 1933, while the trade balance fell into a deficit position that lasted until 1940.

The economic and political crises precipitated by World War II produced a trade agreement among the industrial nations, at the 1944 Bretton Woods Conference in New Hampshire, to end trading blocs and import substitution. New international bodies, notably the General Agreement on Tariffs and Trade (GATT) and the International Monetary Fund (IMF), were established to negotiate tariff reduction and address precipitate currency fluctuations that jeopardized the free exchange of goods. Ostensibly multilateral (i.e., among all nations), tariff reduction as originated by U.S. Secretary of State Cordell Hull actually proceeded through bilateral, or reciprocal, negotiations. At GATT's Geneva Conference in 1947, such negotiations reduced tariff barriers by an average of 50 percent. Most of the industrial economies, however, war‐torn and plagued by competitive disadvantages, used nontariff barriers (e.g., quotas and subsidies) to protect recovering industry, agriculture, and inadequate foreign currency reserves.

Overall, the GATT arrangement did reconstruct a multinational trading system. By 1953, Japan and a European Common Market, enjoying U.S. economic assistance and protected home markets, experienced economic growth at rates double that of the United States. From 1948 to 1957, world trade increased 77 percent, playing a crucial role in the recovery of the industrialized nations and the emergence of the export‐led industrial economies of Southeast Asia. Fearing the exclusion of American products, particularly agricultural ones, from the emerging European Common Market, Congress in 1964 passed the Trade Expansion Act granting the president sweeping (multilateral) authority to place entire categories of products on the bargaining table.

1970 and Beyond

. In 1972, owing in part to the rising imports of high‐priced foreign oil, the United States recorded its first postwar trade deficit on the merchandise account. Blue‐collar jobs, especially those in steel, automobiles, and other heavy metallurgical industries, suffered from foreign competition. By 1985, Japan held 30 percent of the U.S. automobile market. American agricultural exports, which had doubled in the 1970s, fell as world agricultural trade declined in response to rising production and protectionism. China, meanwhile, began its meteoric rise to third place among suppliers to the U.S. consumer nondurables market.

The exports of American multinational corporations (which had proliferated as U.S. corporations invested abroad in the 1960s and 1970s), especially in chemicals, machinery, and transportation equipment, helped ease the U.S. trade deficit. Moreover, 40 percent of U.S. imports originated from the foreign affiliates of American multinationals. Although America's merchandise trade balance shifted decisively into the red (i.e., by the importation of far more goods than it exported), the often‐criticized investment abroad partially countered the deficit by generating $100 billion more in exports to foreign affiliates than foreign firms gained from their investments in the United States.

Downward pressure on U.S. wage rates, popularly associated with the trade deficit, stimulated proposals to improve American “competitiveness” by retaliating against “unfair” trade barriers. These trading partners decried such actions pointing to excessive consumption indicated by historically low U.S. savings rates. When increased net borrowing in the 1990s erased the positive balance of foreign earnings (i.e., income on U.S. investment abroad), increasing the deficit, congressional trade restrictionists attacked U.S. capital exports, which had reached 25 percent of the world's total. These attacks proved ineffectual, but the restrictionists did have some success in extending trade controls.

Aware of the protectionist drift in Congress, Canada consolidated its premier position as the United States's largest trading partner by concluding a free‐trade agreement (1988) that progressively eliminated tariffs over a ten‐year period while making Canadian oil and gas more accessible to the U.S. market. The Mexican government, meanwhile, in pursuit of market‐oriented reforms, sought closer economic ties with the United States. The resulting North American Free Trade Agreement (NAFTA) passed Congress over bitter restrictionist opposition in January 1994. As Canadian and Mexican exports to the United States shot upward, most analysts anticipated greater efficiencies, lower prices, and an increase in high‐tech jobs in the United States to compensate for the expected loss of blue‐collar jobs to Mexico.

In 1999, the U.S. trade deficit reached about $200 billion, an increase to 2.5 percent of GDP (1998) from 1.7 percent in 1989. Some argued that the corresponding trade surpluses of foreign economies, much of which was reinvested in the United States, constituted an undependable component of U.S. financial markets (i.e., if withdrawn). Others emphasized that substantial rates of increase in government and business savings (represented by an apparent end to federal budget deficits and the phenomenally increased value of common stocks, respectively) showed that the nation had done well despite the trade deficit. While the trade deficit reduced the GDP by 1.5 percent in 1998, they noted, the U.S. economy still grew at a rate of nearly 4 percent.

As the 1990s' boom ended in a recession marked by serious job losses, particularly in manufacturing, the nation's commitment to free trade was put to the test. The trade deficit remained high as Americans continued to import far more than they exported. U.S. trade negotiators pressured China and other nations to open their markets to imported goods and to halt the pirating of compact disks and movie DVDs. President George W. Bush, like his recent predecessors, insisted that America's economic future lay with the global economy, but early in 2002 political calculations led him to slap import duties on cheap foreign steel. (Late in 2003, facing retaliation against U.S. exports and sanctions by the World Trade Organization-successor to GATT-Bush withdrew the tariffs.) The 2004 Democratic presidential candidate John Kerry denounced “Benedict Arnold” corporations that exported jobs to low-wage foreign countries, and called for measures to penalize such firms. While the long-term movement toward freer trade in a globalizing economy continued, the issue could still stir controversy, especially in difficult economic times.
See also Agriculture: 1770s to 1890; Agriculture: The “Golden Age” (1890s–1920s); Automotive Industry; Business; Economic Development; Energy Crisis of the 1970s; Expansionism; Foreign Relations: The Economic Dimension; Global Economy, America and the; Iron and Steel Industry; Multinational Enterprises.

Bibliography

W. Elliot Brownlee , Dynamics of Ascent, 1988.
Martin Feldstein, ed., The United States in the World Economy, 1988.
Albert Fishlow and and Stephen Haggard , The United States and the Regionalization of the World Economy, 1992.
Anne Y. Kester, ed., Behind the Numbers: U.S. Trade in the World Economy, 1992.
Henry C. Dethloff , The United States and the Global Economy since 1945, 1997.

Paul P. Abrahams

; Updated by

Paul S. Boyer